Understanding Foreclosures
Bank Owned Properties

To put it simply, a foreclosure is when the borrower cannot make principal or interest payments on the loan for his or her property and the lender repossesses the property and sells it.

The Process of Foreclosures

Understanding foreclosures bank owned properties and how they work begins with understanding the process.

1. Borrower defaults on loan- The borrower begins to default on their mortgage by not making the monthly payments to the bank.

2. The bank issues a NOD- NOD stands for Notice of Default. In most circumstances it is after 90 days of missed payments, although that can vary with the lender and state the property is in. A trustee for the lender will record the NOD at the County Recorder's office.

3. Reinstatement Period- The borrower will have up to 5 days before the home is auctioned off to bring the loan current.

4. Notice of Sale is established- After a certain period of time, if the borrower has not brought the payments current (typically 90 days) a Notice of Sale is filed by the trustee with the County Recorder. The Notice of Sale is posted in the local county newspaper and on the property.

5. Auction Time- After the notice is posted usually about a month later, the auction date is set. This is called a Foreclosure Trustee Sale. The auction date will be listed in the Notice of Sale. The auction occurs on the courthouse steps and will go to the highest bidder. The lender will set the opening bid and if no one bids that much, the attorney conducting the sale for the lender will buy the property back for the lender.

6. The Highest Bidder- The winning bidder will receive the deed to the property. The highest bidder will have to pay the full amount within 24 hours.

What if the bank ends up buying the property back at the auction? The property is then considered REO or real estate owned on a bank's balance sheet. The bank will typically list the REO property with a local real estate agent.

If the property still doesn't sell, the bank will hire a local auction company to auction the property off. The bank may decide to set a reserve or they may do what is known as an absolute auction and auction the property off to the highest bidder with no reserve or minimum price. Also, the lender cannot bid on it or have someone bid on it for them.

If you are wanting to flip a house or build a pool of rentals, purchasing foreclosures bank owned is the way to go. Understanding foreclosures begins here and requires homework on your part.

I just covered the basics here. Check with a local realtor or attorney to understand your state's specific laws regarding foreclosures.

Action Plan for Purchasing Foreclosures

Okay, so you are ready to jump on this bandwagon. Great! Let's go over a few basics. First of all you need to decide if you are going to purchase at the courthouse auction or purchase the property as REO.

If you want to purchase at the courthouse steps, I have a few words of caution. First of all, you are basically buying as is with no inspection. This can be scary. Also, you have to pay the full amount due within a couple of days so you need to be a cash buyer. If you try to do it with a loan, it is often difficult since you have to have the cash so quickly. You need to know your market well and have an understanding of what the property is worth so you don't bid too much.

Remember, just because it is a foreclosure doesn't mean you will automatically be buying it at a discount!

I believe purchasing on the courthouse steps is much better for seasoned, savy investors who can handle unexpected repairs.

A much safer method is purchasing REO property.

I hope this page helped your understanding foreclosures.

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